Cummins India’s FY14F to remain weak on falling powergen demand

There is a continued sense of concern over the near-term outlook on powergen and exports segments for Cummins India, according to Nomura Financial Advisory and

Securities in its research note on the company based on its meeting with Rajiv Batra, CFO, Cummins India. However, export realisations could lead to gains in margins on account of the depreciating rupee.


Nomura recommends investors to remain focused on the fundamentally superior business model and franchise that Cummins India offers with a solid long-term opportunity in a power-short India. Nomura had been waiting for a better entry point given its expensive valuations so far. The Cummins India has a ‘Neutral’ recommendation with a target price of Rs382.


In the long term, Nomura believes that India’s industrial sector offers the unfolding of a substantial opportunity in coming years. In particular, it sees potential opportunities in niche segments. Powergen is one of the best hi-tech niche segments.


The business forecast for Cummins India, according to Nomura analysts, is given below:



According to the CFO of the company, the overall economic slowdown is a big worry and that has led to the postponement of capex decisions, thus, hurting back-up power demand. A continued slowdown in capex decisions for industrial/ commercial projects could continue to hamper powergen growth beyond what is already visible, Nomura adds in its research note.


On the industrial segment, the Nomura research note mentions that the company had been doing well until now led by water well rigs (40% of the segment now) on the back of water scarcity last year. However, good monsoons this year could be a concern for the demand from this segment, in our view. Other bit of demand support for the segment continues from construction equipment original equipment manufacturers (OEMs) which are seeing increased offtake due to better export pricing.


On the exports side, according to Nomura, only 15% of the company’s exports in the high HP segment (2/3rd of all exports) are into the US, while Middle East, Europe/Russia and Africa contribute about 40% where demand is still declining. As such, hopes of a US recovery benefitting exports are misled, in Nomura’s view.


The CFO also expects that the replacement cycle of DG sets will elongate from the current 8-10 years to 10-15 years as the usage of gensets is decreasing following better power availability, concludes the Nomura research note.


Morgan Stanley cuts 2013-14 earnings growth for Sensex to 10.5%

It expects earnings growth to be 12.7% in 2014-15

Morgan Stanley Research, in its note on the stock market, is trimming its broad market earnings growth forecast for F2014 to -6% from 12% and is introducing an estimate of 5% for F2015.  It has cut its Sensex earnings growth estimates from 10.5% to 4.1% for FY2014 and from 19.0% to 12.7% for F2015.  Morgan Stanley has issued a new 12-month forward Sensex target of 18,200. 


There is however, a 35% probability of a bear market scenario and hence, a 14% fall in the Sensex. These forecasts are shown in the chart below:


The research note suggests that RBI will reaffirm that high rates will linger (via a repo rate hike, for example) and the government needs to endorse fiscal consolidation (which could be at risk – a steep diesel price hike could be a good change). Both agencies are impeded; the former by the state of growth and the latter by the political cycle.  Sans policy measures, the market will be punitive with prices (especially the Indian rupee) forcing macro rebalancing.  In time, higher public savings and real rates will bring down the current deficit, forecasts Morgan Stanley.


Morgan Stanley’s (MS) research note also evaluates as what the stock market is pricing in. Its valuation template is the equity yield minus short-term yield as in 1998.  A negative gap implies the market is not cheap. The market is pricing in 6M (six months) forward 9% nominal IIP growth (MS estimate 4%) and -5% one-year forward earnings growth (versus MS -6% F14 estimate) and it offers a 5.8% risk premium (below MS 6% fair level estimate). The problem is duration and not just the depth of price correction, concludes the research note. This means that it will take a long time for market cycle to turn up.


Shriram Mutual Fund: Nothing new to offer and a host of regulatory issues in the past
In an effort to revive its mutual fund business, Shriram Mutual Fund plans to launch a new scheme. The company had failed to comply with regulations in the past and eventually wound up its schemes in 2001
Shriram Asset Management Company (AMC) which is the only listed fund house in India, offered mutual fund schemes in the 1990s. All of its schemes were wound up by December 2001. In an effort to revive its defunct mutual fund business, the fund house is planning to launch a new scheme—Shriram Balanced Fund. However, investors should know that the AMC had fallen foul of serious regulatory issues in the past.
Shriram Mutual was involved in price rigging of Videocon International in June 1998. The Adjudicating & Enquiry Officer at that time had imposed a penalty of Rs5 lakh on Shriram AMC. The Securities and Exchange Board of India (SEBI) ordered the company to pay Rs25.62 lakh with 15% interest per annum towards the corpus of the concerned schemes, being the loss caused to the unit holders. SEBI then directed two officials of the AMC to resign and specified that its managing director shall not be eligible to hold any public position in any capital-market related public institutions for three years. SEBI also directed to change the composition of the board of trustees. In January 2000, the fund house was pulled up by the regulator for delaying redemption request by more than 10 days in 473 cases, which is a violation of Regulation 53(b) of the SEBI Mutual Fund regulations. The company was also found holding more than 10% of a company’s paid up capital carrying voting rights, thus violating another clause of the regulations. 
Last year, the board of directors had approached SEBI for their permission to launch new schemes. In November 12, 2012 SEBI granted its approval to Shriram Mutual Fund to re-start its business. The fund house says that it would be able to leverage the extensive retail reach of Shriram Group to market the mutual fund schemes. However, its failure to comply with regulation in the past would play on the mind of investors.
An investor has over 350 equity schemes to choose from, many with overlapping investment objectives. The only differentiator between such schemes is the historical performance of the schemes and fund management history of the fund house. There are over 20 balanced schemes available for subscription. With no track record and a chequered history, would give investors little reason to opt for the scheme. 
Balanced mutual fund schemes have not been great performers in the past. These schemes invest a minimum 65% of their corpus in equity and the rest in debt. Of the 19 schemes which have been in existence for more than five years, just one scheme has outperformed the benchmark in each of the one-year, three-year and five-year period ending 30 August 2013. As many as four schemes have underperformed the benchmark in all three periods. As many as 11 schemes have a corpus less than Rs100 crore. This just portrays that even investors are not interested in these schemes.
Read more about balanced schemes: Best Balanced Schemes?
The scheme from Shriram MF would be managed by Partha Ray, who has been in the Banking & Finance sector for over 22 years.

Other details of the scheme

Benchmark: CRISIL Balanced Fund Index


Entry Load: Nil

Exit Load: 1% for exit up to 365 days from the date of allotment

Minimum Initial Purchase: Minimum of Rs.5,000/- and in multiples of Re. 1/- thereafter.

Additional Purchase Amount: Minimum of Rs.1,000/- and in multiples of Re. 1/- thereafter.

Other Expenses

Maximum total expense ratio (TER) permissible under Regulation 52 (6) (c) (i) and (6) (a) Upto 2.50%

Additional expenses under regulation 52 (6A) (c) Upto 0.20%

Additional expenses for gross new inflows from specified cities Upto 0.30%



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